Written by Caroline Harris, PARTNER; Michele Greenwood, LAWYER on August 5th, 2016.

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Prattley Enterprise Limited v Vero Insurance New Zealand Ltd

In Prattley Enterprise Limited v Vero Insurance New Zealand Ltd the Court of Appeal considered how “final” a “full and final” settlement clause was when a party argued that there had been a mistake when entering into the settlement agreement.

The Christchurch Earthquakes of 2010 and 2011 left the 1920’s Worchester Tower in such a state that it was uneconomic to repair it. Unfortunately, the old dame’s time was up and she had to be demolished. Her owner, Prattley, had purchased limited indemnity insurance with Vero. In 2011, after much consideration and numerous valuations, Prattley reached a settlement with Vero for an amount equivalent to the pre-earthquake market value, which the parties understood to be the correct measure of indemnity value. Both parties were apparently content to settle on this basis. In the interests of achieving certainty, the settlement agreement included a clause that payment of the agreed settlement sum was in full and final settlement and in discharge of all present and future claims whether known or unknown, in connection with the damage, the earthquakes and the policy, and on whatever legal or equitable basis such claims might arise.

Common mistake claim under Contractual Mistakes Act

It was not until 2014, after hearing about the amounts awarded by the courts in other similar cases that Prattley decided both it and Vero had been operating under a common mistake about the correct measure of Prattley’s entitlement under the policy when they negotiated the full and final settlement. Prattley considered the correct measure of indemnity should have been the total reinstatement cost attributable to each earthquake rather than the pre-earthquake market value. Relying on the Contractual Mistakes Act, Prattley sought to set aside the settlement agreement and revisit its claim against Vero.

One of the challenges for Prattley was to convince the Court that they had not assumed the risk of there being a mistake as their actual entitlement under the full and final settlement clause. The Contractual Mistakes Act offers relief in situations where the parties to a contract enter into the contract under a common mistake. Relief can include setting aside the agreement in full.

The Court of Appeal upheld the High Court decision that Prattley had assumed the risk of mistake. The Court made the following observations:

It was of no consequence that the settlement agreement did not contain an express provision for the event of mistake because accepting the risk of a mistake could be implied within the contract.

The correct approach when considering whether an exclusion clause extends to the risk of mistake is to consider whether the parties had the type of mistake in mind when negotiating the agreement. The fact that Prattley and Vero had considered the measure of the insured’s entitlement to indemnity under the policy as a basis for negotiating settlement, supported this mistake being of the kind that the parties would have had in mind. Therefore this type of mistake was held to be covered by the exclusion clause.

A party may enter into a binding settlement regarding a future or current claim which the party has not considered and knows nothing about. This recognises the importance of the word “final” in a “full and final” settlement clause, and the fact that it is this finality that facilitates settlements.

Conversely, a court may read down the all-inclusive and general wording of an exclusion clause in order to exclude the risk of mistake if the factual context shows that a party knew nothing about the type of claim or the rights they were surrendering.

Finality of settlement agreements

The Court of Appeal decision in Prattley highlights the importance of understanding the potential finality of settlement agreements, even where there has been a mistake as to the extent of the rights or claims that are being settled. Settlement of legal claims should be undertaken with care and with the benefit of legal advice.

How we can help

For settlement of legal claims, or for advice when a contract may have been entered into under a mistake, contact our Litigation and Dispute Resolution Team.